Beware Of Sudden And Sharp Fall

-By NIPUN MEHTA
Well-known Private Banker and Market Strategist

Before the year started, the domestic economy and stock markets were exuberant with expectations of yet another bull run in 2011. However, the first quarter of 2011 has seen the emergence of unforeseen global disturbances that could result in an uncertain, tumultuous year for the world as a whole. So what does 2011 have in store for an Indian stock market investor?

Factors such as an inexorably high domestic inflation, rising interest rates and their corresponding impact on corporate sector profitability, a serious governance deficit at the national level and the Middle-East crisis threatening to take oil prices still higher have all led to an FII selling spree in the domestic stock markets. To top it all, nature brought a Japanese catastrophe on to the global stage.

The Japanese situation will have its own impact largely coming from the fact that as a cash-rich state, it has funded countries, invested in economies and given grants to various organisations, etc. The sheer size and volumes involved in the Japanese rebuilding of their infra-structure and houses will ensure that a good portion of those investment funds will be diverted for these mega-projects. This could mean either deprivation of funds for several large projects or even pulling out of investments in certain markets. Either way, sucking out capital will always have its impact on FDI or FII portfolio investments. On the other hand, the rebuilding of Japan could mean an opportunity for select Indian companies.

While signs of a turnaround in the US and European economies are visible, such a turnaround can be expected to be grindingly slow. Is there a possibility of yet another PIIGS-like crisis being thrown up in the developed world? It looks unlikely. Huge government aid and the tranches of quantitative easing, etc, will ensure that it remains unlikely, at least not as serious.

With rising incomes, India’s consumption continues to act as a serious contributor to GDP growth. The sectors mirroring this consumption-led growth should clearly benefit. This means that FMCG, two- and four-wheeler companies and paint manufacturers, etc, will be its direct beneficiaries.

Infrastructure was a clear under-performer last year. The execution of projects takes time and is preceded by bidding and financial closure, etc. This means infrastructure might not be a runaway winner in the first few months of this year too. The second half could be better if the government earnestly takes up the execution of key road, port and power projects.

Banking as a sector has shown consistent growth over several quarters now. A higher cost of funds could eat into margins, but the sector would truly mirror India’s growth story led by consumption and investment. Don’t hesitate to take exposure to either large or mid-sized PSUs or private sector banks. Real estate, on the other hand, has been under pressure and could run into some rough weather.

So what does a retail investor do in such a market? Well, in the short term, watching the range-bound movement from the sidelines could be a good idea rather than getting mauled by sudden price movements. A stock-based approach will be more fruitful in such circumstances. Be on the lookout for any unwarranted sharp fall in any stock, because that could be your next multi-bagger opportunity if held for a long term. As for the broader market, a 15-18 per cent return from the current levels cannot be ruled out over the next year. Happy investing!